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Roadshow, Öhman Baltic Banking Day, Priit Perens

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Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to ...

Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.

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Roadshow, Öhman Baltic Banking Day, Priit Perens Roadshow, Öhman Baltic Banking Day, Priit Perens Presentation Transcript

  • Swedbank Estonia Q3 2008 Priit Perens
  • I Overview of the macroeconomic situation II Overview of the Banking sector in Estonia III Swedbank Estonia - Market shares/volumes - Financial results - Credit portfolio 2
  • Estonian economy is rebalancing 3
  • Estonian macroeconomic environment • 2006-2007 Estonian rapid GDP growth was based on internal consumption and inflow of external money • Now GDP growth is negative (-0,5%, Eurostat) • Consumer confidence is dropping bringing down internal consumption • Residential real estate market is illiquid and prices are down around 20 % • Import is declining (-6% in August yoy), export growth is still strong (+8% in August yoy) • Economy is rebalancing, but further development depends on success in building more competitive export companies. • Dependence on foreign funding still high – loan deposit ratio ca 189% • KEY Issues: – How are our export target countries economies doing? – Access to liquidity? 4
  • GDP growth has dropped to negative area 15% 10% 5% 0% 1990 1993 1996 1999 2002 2005 2008p 2011p -5% -10% -15% 5
  • Belief into the future has vanished But there is strong effect of international financial crisis Confidence indexes 60 industry 40 consumer construction 20 retail 0 service May-02 May-03 May-04 May-05 May-06 May-07 May-08 -20 -40 -60 6
  • Low confidence is reflected in the consumption Annual growth of retail sales 80% 60% 40% 20% 0% Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 -20% -40% retail total cars and related items other goods clothes furnishings etc During the last months the car sales down average by 38%, incl. new cars 24%, used cars 47% 7
  • Without consumption there is no production … Growth of industrial production 25% 20% 15% 10% 5% 0% Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 -5% industrial production manufacturing industry production -10% export sales internal market sales 8
  • But rumors about death of core Estonian export are exaggerated 50% Annual export growth 500% 40% 400% 30% 300% 20% 200% 10% 100% 0% 0% Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 -10% -100% -20% -200% -30% -300% -40% -400% electronics passanger cars other goods mineral products (rhs) 9
  • Labor cost per hour in Euros/ 2006 Germany Sweden Finland Lithuania Latvia Estonia 0 10 20 30 40 10
  • There is no dominant sector in Estonian export (Jan-Aug 2008, change in the brackets) others (6.5%) groceries (13.8%) textiles (-1.8%) mineral products (-21.2%) vehicles (-0.1%) chemical products (18.3%) machinery etc (+7.8%) wood, paper electronics (-2.7%) (+13.2%) 11
  • Rebalancing of economy CAD, % to GDP 15% 40% 10% 35% 5% 30% 0% 25% -5% 05(I) 05(III) 06(I) 06(III) 07(I) 07(III) 08(I) 20% -10% 15% -15% 10% -20% 5% -25% 0% -30% -5% goods services income transfers export growth import growth 12
  • The components of CAD, % to GDP 10 5 0 -5 2007 2008 6M -10 -15 -20 -25 goods and services FDI reinvested FDI dividends interests other private sector return/transfers EU funds Estonian government payments 13
  • Real estate market: Estonia Gradual correction in residential market since April 2007 Market situation Tallinn apartment price and transaction development • Lower numbers of transactions, longer sale 1,800 1,800 periods and decreasing prices in residential real 1,600 1,700 estate 1,400 No of transactions 1,600 • Apartment prices down -22% from peak in Apr’07. 1,500 1,200 EUR/m2 1,000 Further decrease is likely. 1,400 800 • Difficult to sell apartments in unfinished buildings 1,300 600 • Largest decrease in transactions of land plots due 1,200 400 1,100 to higher construction costs and higher risk to 200 1,000 0 complete the construction without a profit Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 No of deals (rhs) Average price (lhs) Market outlook • Several developers have liquidity problems and stock of unsold apartments is increasing. It is Tallinn office rent and vacancy development likely that prices on new apartments will continue 20 25% to decrease 18 20% Vacancy rate EUR/m2/month • Risk of tenants reducing their office areas. Start- 16 15% up office projects and office buildings with weak 14 10% concepts and poor quality will be most affected • The quality of tenant mix, rental agreements, 12 5% location, popularity of retail centers will be crucial 10 0% 2002 2003 2004 2005 2006 2007 Rent rate Vacancy rate Source: * Residential data – Estonia land board ** Office data – credit analysts data 14
  • Banking market 15
  • Estonian Banking Sector: Financing* and Deposits 12,000 190% 10,000 170% 8,000 150% mio EUR 130% 6,000 110% 4,000 90% 2,000 70% 0 50% 03/03 09/03 03/04 09/04 03/05 09/05 03/06 09/06 03/07 09/07 03/08 09/08 Financing - Corporate Financing - Private Deposits - Corporate Deposits -Private Loan/deposits (rhs) *Financing – loan, leasing, factoring 16
  • Estonian Banking Sector: Credit quality 5% 4% 3% 2% 1% 0% 09- 09- 09- 09- 09- 09- 09- 09- 09- 09- 09- 09- 97 98 99 00 01 02 03 04 05 06 07 08 Overdue >60 days Provisions 17
  • Bank debt to GDP Outstanding bank debt to GDP (2007) 400% • Note: Outstanding bank debt only. 300% Leasing/factoring excluded; other forms of corporate financing 200% excluded. Financial institutions 100% excluded. Public sector under corporate. 0% Latvia Slovakia Slovenia Ireland Estonia Lithuania Poland Spain Finland Sweden Portugal Czech Republic Hungary Denmark Outstanding bank debt to GDP - Estonia 50% 47% 43% 45% 38% 40% 32% 28% 30% 24% 20% 20% 19% 20% 19% 18% 18% 18% 20% 13% 13% 15% 14% 11% 7% 7% 8% 10% 6% 5% 2% 2% 3% 0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Corporate Private 18
  • Swedbank Estonia 19
  • Highlights • Long-term focus maintained on core strategic strengths - performance culture, credit skills, wide distribution and strong team • Short-term focus on managing the business through the economic cycle with particular focus on productivity and asset quality • Steps taken in the beginning of 2007 have slowed down credit growth and the trend is expected to continue throughout 2008. As a result, minor deterioration in market shares has been visible and is also expected going forward. However, no major change is expected. • Employee productivity is being monitored closely and employee growth will be negative during 2008 given slowdown in volume growth. Operational efficiency program is gradually rolled out in all countries. • Credit teams have been strengthened and work-out processes are being reviewed to a more pro-active stance. Asset quality indicators (credit losses, overdues) have risen according to expectations 20
  • Loans and Deposits Loans (incl leasing&factoring) Loan (incl leasing&factoring) 1,600 300 change * change 9m 2008 1,400 250 Loan (inl leasing and factoring) to deposits 1,200 200 250% 1,000 EURm EURm 150 800 255 1,411 229 100 600 50 118 400 200% 602 200 0 1Q 08 2Q 08 3Q 08 0 BB Est Market 150% Deposits (group consolidated) * Deposits' change 9m 2008 700 (bank solo) 150 100 450 100% EURm 117 EURm 50 90 12/06 03/07 06/07 09/07 12/07 03/08 06/08 09/08 408 Rest of the Market Swedbank Estonia 200 0 155 -50 -115 -50 1Q 08 2Q 08 3Q 08 -100 BB Est Market -150 * According to Management reporting (consolidated). Trade Finance portfolio was taken into Estonian books from January (loan +111 m EUR; deposits +71 m EUR) This change was eliminated from 1Q 2008 change 21
  • Market Shares Dec 06 Dec 07 Jun 08 Sept 08 Mortgage 49.2% 48.9% 48.7% 48.6% Consumer finance 59.0% 55.0% 55.3% 55.3% Corporate financing 46.0% 43.4% 43.1% 42.9% Car leasing 56.1% 53.6% 52.7% 52.2% Deposits 53.2% 53.0% 54.4% 52.4% P2S 52.3% 52.4% 52.6% 53.0% Funds 53.9% 57.6% 56.4% 54.9% Domestic payments 65.4% 65.0% 65.0% 64.9% POS 61.2% 62.3% 65.9% 68.0% 22
  • Quarterly trend - Estonia Net profit Credit losses 70 16 60 14 50 12 mln EUR 10 mln EUR 40 8 30 57 60 62 14 47 52 49 52 6 20 10 11 4 8 7 10 2 3 2 0 0 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Cost - Income ratio Return on Equity 42.5% 45% 45% 40% 36.1% 37.6% 34.4% 37.9% 39.9% 36.3% 40% 35% 35% 30% 30% 25% 25% 20% 20% 41% 41% 39% 15% 15% 33% 32% 32% 28% 10% 10% 5% 5% 0% 0% Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 23
  • Performance against mid-term financial targets Estonia Q3 2008 YTD 2008 BBTarget EBT growth, YoY -15% -14% >20% ROE on actual equity 32% 32% >20% Cost-income 36% 38% <42% Net loan losses 0.76% 0.55% <0.35% Loan to deposit ratio 168.9% 168.9% *Net loan losses = (changes in general and special provisions + net write offs) / credit portfolio at the beginning of the year 24
  • Financial highlights - Estonia 2008 2007 Q3 08 Q3 07 YoY % YTD % YTD YTD Revenues (mln EUR) 104 105 -1% 298 298 0% Expenses (mln EUR) 38 36 5% 113 107 6% Net Loan Losses (mln EUR) 14 8 88% 32 13 147% Net profit (mln EUR) 52 62 -15% 153 178 -14% Return on Equity 32% 39% 32% 39% Cost-income 36.3% 34.4% 38.0% 36.0% Net interest margin 2.76% 2.74% 2.57% 2.75% Loans (mln EUR) 8,246 7,217 14% Deposits (mln EUR) 4,883 4,360 12% Employees (FTE) 2,528 2,729 -7% 25
  • Contribution to net income change ‘08 vs ‘07 YTD Trading Income By main P&L items 220 30 210 200 25 -7.5 190 22.0 -11.6 20 EURm EURm 180 -25.9 3.2 -1.7 -4.4 15 27.4 -1.8 170 8.7 160 -19.2 10 178.1 -9.4 150 5 -0.3 -1.6 -1.2 1.6 140 153.2 0 130 07 YTD Markets Asset Life Ins P&C Ins Treasury FX & cl 08 YTD I es 07 NI i nc rI ns r in c ex p Ex p NL L 08 Eq Man Eq Eq Eq FI margins NI Fe ing er NI Ne t cf he rs Tr a d In Ot Pe Ot h Net Fees & Commissions 80.0 2.9 -0.5 -0.5 75.0 -4.5 70.0 -5.0 EURm 65.0 75.4 60.0 67.8 55.0 50.0 07 YTD Card Loans Cash Securities Other Sept 08 26
  • Net interest income Net fees and commissions Revenue 80 +12.1% 80 60 60 40 40 -10.0% 20 20 Reveue 2007 Revenue 2008 120 0 0 +0.2% YoY 1Q08 2Q08 3Q08 4Q08 1Q08 2Q08 3Q08 4Q08 100 Trading Income from insurance Other income 80 80 80 80 60 60 60 60 -94.3% YoY 40 40 40 40 +120.1% +53.8% 20 20 20 20 0 0 0 0 1Q08 2Q08 3Q08 4Q08 1Q08 2Q08 3Q08 4Q08 1Q08 2Q08 3Q08 4Q08 1Q08 2Q08 3Q08 4Q08 -20 YTD YTD EUR in millions 3Q 2008 2Q 2008 Delta QoQ% 2008 2007 YoY% Net interest income 74.3 64.3 10.0 15.5% 204.0 182.0 12.1% Net fee income 22.3 22.5 -0.2 -0.9% 67.8 75.4 -10.0% Trading income -1.0 4.0 -5.0 -125.3% 1.6 27.4 -94.3% Income from insurance 5.6 5.3 0.3 5.4% 15.9 7.2 120.1% Other income 3.3 3.2 0.1 2.3% 9.1 5.9 53.8% Total revenues 104.5 99.4 5.1 5.2% 298.3 297.9 0.2% 27
  • Operating expenses Personnel IT Admin 20 20 40 +3.7% YoY +8.0% YoY +27.8% YoY Total OpEx 2007 Total OpEx 2008 50 10 10 20 +5.7% YoY 40 0 0 0 1Q08 2Q08 3Q08 4Q08 1Q08 2Q08 3Q08 4Q08 1Q08 2Q08 3Q08 4Q08 30 Marketing Other Group 20 20 20 20 +24.0% YoY -34.1% YoY -9.4% YoY 10 10 10 10 0 0 0 0 1Q08 2Q08 3Q08 4Q08 1Q08 2Q08 3Q08 4Q08 1Q08 2Q08 3Q08 4Q08 1Q08 2Q08 3Q08 4Q08 YTD EUR in millions 3Q 2008 2Q 2008 Delta QoQ% 2008 YTD 2007 YoY% Personnel 15.2 16.2 -1.0 -6.0% 48.3 46.5 3.7% IT expenses 7.5 8.0 -0.4 -5.6% 22.7 21.0 8.0% Administration 8.1 7.0 1.1 15.7% 21.2 16.6 27.8% Marketing 1.3 1.5 -0.2 -11.1% 4.1 4.5 -9.4% Other expenses 2.5 3.2 -0.7 -22.7% 7.9 6.1 31.1% Depreciation 0.8 0.8 0.0 -1.4% 2.5 2.3 5.8% Group adjustments 2.5 3.0 -0.5 -16.2% 6.7 10.1 -34.1% Operating expenses 37.9 39.6 -1.7 -4.3% 113.4 107.2 5.7% Employees (FTE) 2 528 2 789 -261 -9.4% 2 528 2 729 -7.4% Employees (FTE) excl pr 2 506 2 621 -115 -4.4% 2 506 2 720 -7.8% 28
  • Portfolio disclosure 29
  • Credit quality of the loan book Risk profile remains balanced Large corporate risk profile 1,000 PD<1% • Well diversified portfolio dominated by retail Non- EURm exposures 500 performing • Macro developments have triggered some downgrades in all segments: 0 – Real estate sector drives downgrades in large 1 1- 2 2- 3 3- 4 4- 5 5- 6 6- 7 corporate segment (exposure > 0.8 mio EUR). Q4 2007 Q2 2008 Q3 2008 Downgrades counterweighted by new lending to low risk clients SME/SSE risk profile 350 – SME/SSE has been the most sensitive to 300 PD<1% downturn. Acceptable risk profile (55% of Non- 250 performing EURm portfolio with PD<1) 200 150 – Private portfolio has low risk profile (78% with 100 PD<1%) 50 0 A A- B B- C C- D D- E E- F Estonia risk exposure (9 053 mEUR)*, Q3 2008 SME/SSE Q4 2007 Q2 2008 Q3 2008 16% mortgage Private portfolio risk profile Private 1,500 79% 43% PD<1% revolving Non- EURm 3% 750 performing consumer Large 10% 0 corporate leasing 1 2 3 4 5 6 7 8 9 10 11 12 42% 8% Q4 2007 Q2 2008 Q3 2008 * Risk exposure: on-balance + off-balance portfolio 30
  • Credit quality Swedbank Estonia overdue performance considerably better than the rest of the market Provisions / current portfolio Overdue over 60 days / current portfolio 3% 3% 2% 2% 1% 1% 0% 0% May.08 Jun.06 Jun.07 Jun.08 Mar.06 Mar.07 Mar.08 Apr.08 Aug.08 Dec.05 Mar.06 Sep.06 Dec.06 Mar.07 Sep.07 Dec.07 Mar.08 Sep.08 Sep.06 Jul.08 Sep.08 Dec.05 Jun.06 Sep.07 Jun.08 Dec.06 Jun.07 Dec.07 Rest of the market Swedbank Estonia (Bank) Rest of the market Swedbank Estonia (Bank) 31
  • Corporate >60 day overdues Corporates (rating cust) 3.5% SME 3.5% 3.0% 3.0% 2.5% 2.08% 2.5% 1.89% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% 12- 03- 06- 09- 12- 03- 06- 09- 12- 03- 06- 09- 12- 03- 06- 09- 06 07 07 07 07 08 08 08 06 07 07 07 07 08 08 08 4.5% SSE All Corporates 3.5% 4.0% 3.0% 3.5% 3.0% 2.5% 2.38% 1.99% 2.5% 2.0% 2.0% 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% 12- 03- 06- 09- 12- 03- 06- 09- 12- 03- 06- 09- 12- 03- 06- 09- 06 07 07 07 07 08 08 08 06 07 07 07 07 08 08 08 32
  • Large corporate portfolio Credit losses relatively isolated in the real estate sector Large corporate risk profile • Downgrades in large corporate (exposure > 25% EUR 0.8m) portfolio has been 20% Q4 2007 counterbalanced with lending to customers Q2 2008 with low risk 15% Q3 2008 10% • The main part of 6&7 ratings comes from real estate sector (in particular residential 5% real estate development & early 0% development) 1 1- 2 2- 3 3- 4 4- 5 5- 6 6- 7 Estonia Rating 6&7 exposures by industries Commercial real estate Production Q4 2007 Retailing Q2 2008 Transportation Q3 2008 Other EURm 0 20 40 60 80 100 33
  • Lending by sectors Portfolio, (9053 EURm) Sept 2008 Industry Individuals 6% 44% Transport 5% Retail & Wholesale 5% Real-estate mgmt 15% Construction Other 3% 22% 34
  • Real estate portfolio Most sensitive part of portfolio to current changes in macro environment. Developments according to expectation. • The residential real estate development is the most sensitive sector in Baltic Banking portfolio. Sensitivity’ has started to appear in overdue and Real Estate default figures of corporate portfolio. 6% • Around 60% from total Real Estate 23% portfolio are cash flow generating 15% properties with good tenant mix. Office • Properties under development process Production & (25% of RE portfolio) are currently affected the Warehouse most by decreasing prices and liquidity in the 6% Residential market. • Additional defaults in residential real estate Retail development sector are anticipated in 2008, but no 25% Land plots major surprises are expected due to previously implemented portfolio limitations and individual 25% Other level monitoring. Restructuring capacity has been put in place. 35
  • Other sectors under close watch Transportation Trucking companies are facing problems due to increasing fuel prices and lagging freight rates. This global problem has started to reflect in Baltic Banking provisions (especially in SME segments) since the beginning of the year. Retail & wholesale Well performing sector with low levels of overdues, but potentially vulnerable to decreasing consumption Wood processing Raw material price increase coupled with sales price downwards pressure have a negative impact on Baltic wood processing industry. Current portfolio quality is around average with only few problem cases observed. Additional problems may occur after export duties will be imposed on Russian round wood as there is dependence on imported round wood in Estonia. * Overdues over 60 days / 12 months old portfolio 36
  • Private >60 day overdues mortgage 79% consumer 13% leasing 8% Mortgage Consumer finance 1.0% 0.88% 3.0% 2.44% 0.8% 2.5% 2.0% 1.81% 0.6% 0.43% 1.5% 0.4% 1.60% 1.0% 1.01% 0.2% 0.32% 0.12% 0.5% 0.0% 0.0% 12- 03- 06- 09- 12- 03- 06- 09- 12- 03- 06- 09- 12- 03- 06- 09- 06 07 07 07 07 08 08 08 06 07 07 07 07 08 08 08 Car leasing Total private 1.6% 1.2% 1.35% 1.04% 1.4% 1.0% 1.2% 0.99% 0.8% 1.0% 0.58% 0.8% 0.63% 0.6% 0.87% 0.6% 0.4% 0.4% 0.28% 0.48% 0.2% 0.2% 0.0% 0.0% 12- 03- 06- 09- 12- 03- 06- 09- 12- 03- 06- 09- 12- 03- 06- 09- 06 07 07 07 07 08 08 08 06 07 07 07 07 08 08 08 37
  • Portfolio quality better than in more stable developed markets Mortgage delinquency rates* Percentage of outstanding amount of loans 6 5 4 USA 3 Finland 2 France UK 1 Canada Spain Swedbank Australia Estonia 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 *Mortgages >90 days in overdues / portfolio Note: Loans refer to mortgages for all countries except Finland and Italy where they include all loans to the households sector. For Italy, they refer to new bad debts during the year as a percentage of outstanding loans. 38
  • Mortgage portfolio Main reasons for payment difficulty • Employers in difficulties – lower workload, loss of work, problems with salary (drop or delay in payment): mainly in companies connected to real estate, construction, transport, industrial goods, furniture and wood industry • Change of employment Portfolio Mortgage risk profile 250 3,500 45% 3,000 40% 200 35% 2,500 30% 150 2,000 25% 20% 100 1,500 15% 1,000 10% 50 500 5% 0% 0 0 1 2 3 4 5 6 7 8 9 10 11 12 3Q 05 4Q 05 1Q 06 2Q 06 3Q 06 4Q 06 1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 Portfolio, Dec-07 Portfolio, Sept-08 Growth Portfolio (right hand scale) 39
  • Mortgage LTV (indexed market values) Portfolio average LTV below 60% Mortgage LTV and portfolio by year of origination EURm Estonia • Apartment / private house price drop in EE (- 22% from peak) 1000 80% has reduced positive effect from portfolio ‘maturing’ 63% 68% 64% 60% 750 • Higher LTV portfolio issued for safe ‘home loan’ segment 40% 500 • No difference observed in overdue / default levels for ‘high’ 20% and ‘low’ LTV segments. 250 0% 0 -20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 Indexed LTV values and maturity for private apartments 20% Mortgage portfolio - LTV / houses* EE LTV, total portfolio - August '08 59% Average maturity 21y 10% *Should be treated as conservative evaluation (do not 0% account for guarantees and other non-residential RE 0- 10- 20- 30- 40- 50- 60- 70- 80- 90- >100 collaterals) 10% 20 30 40 50 60 70 80 90 100 Back book, Sept 08 40
  • Summary • Growth of Estonian economy has stopped • Resulting fast rebalancing of the economy. • Still high dependence on foreign funding (but not directly from the international markets) • Swedbank Estonia is showing relatively strong results, yoy income declined by 14% caused by increasing loan losses and losses from equities trading. • Efficiency still high • The Bank’s main activity is managing credit portfolio and improving efficiency • Credit portfolio quality is deteriorating. Residential real estate development under growing stress. No spillover to other sectors. 41
  • Thank you!
  • Portfolio quality Credit losses driven by real estate defaults • Credit losses mostly driven by worsening macro situation • Real estate (in particular residential real estate development projects) is the main driver of credit losses • Trend is in line with updated credit loss forecast level Estonia Net loan losses, YTD 9m 2008 EURm Ratio Rated companies (exposure >0.8m EUR) 17.8 0.84% - Commercial real estate 14.3 1.76% - Production 1.0 0.43% - Retailing 0.8 0.45% - Transportation -0.4 -0.16% - Other 2.1 0.32% SME/SSE companies (exposure <0.8m EUR) 6.4 0.67% Private individuals 7.5 0.27% - Mortgage 2.7 0.13% - Revolving 1.0 1.30% - Consumer products 3.0 1.79% - Car leasing 0.6 0.34% - Other 0.1 0.06% Total 31.6 0.55% 43
  • Key financials Estonia Q3 Q2 Q3 Q3 Q3 YTD YTD YTD in millions of EUR 2008 2008 ∆ QoQ 2007 % ∆YoY 2008 2007 % ∆ YoY Loans 8,246 8,128 118 7,217 14% Deposits 4,883 4,998 -115 4,360 12% Revenues 104 99 5 105 -1% 298 298 0% Expenses 38 40 -2 36 5% 113 107 6% EBT 52 49 3 62 -15% 153 178 -14% Net income 52 49 3 62 -15% 153 178 -14% EVA on allocated equity 28 26 2 44 -37% 83 131 -36% Return on equity1 32.2% 31.5% 38.5% 32.2% 40.0% Cost-income 36.3% 39.9% 34.4% 38.0% 36.0% Net interest margin 2.76% 2.41% 2.74% 2.57% 2.75% Net loan losses 76 bp 58 bp 50 bp 57 bp 29 bp Employees (FTE)2 2,528 2,789 -261 2,729 -7% 1 ROE is calculated based on Swedbank capital allocation: 8.4% for the Baltics 2 44 without Group and IT
  • Provisioning principles • Credit portfolio losses are recognised through special and portfolio provisions • Main guidelines for estimating provisions: Portfolio provisions Special provisioning for Portfolio segment Impairment trigger (for performing portfolio) impaired assets Individual assessment based on default frequency (based on rating) * Net present value (based on Large corporate Rating 6 - 7 LGD (based on credit analyst estimate) discounted value of revalued collateral and cash flow) fixed LGD (based on asset type for SME Fixed rate for all portfolio Overdue >90 days leasing) Retail Fixed rate based on product type Overdue >90 days product specific LGD • Key regulations for provision estimation are: provisioning principles and provisioning rates • Supplementary regulations are: LGD methodology and rating methodology • Current provisions constitute 1.05% of credit portfolio (111 EURm portfolio provisions and 106 EURm special provisions) • General and special provision rates are back-tested once per year. Historically provisions have always covered loan losses with a reserve LGD – loss given default 45
  • Regular process of outstanding loan review • Portfolio quality improvement measures introduced already in 2007 – Increased risk margin in certain sectors (eg real-estate) – Portfolio limitation and close individual level monitoring for higher risk segments – Stricter product conditions (LTV, service ratio, previous credit history). Ongoing review and adjustments Improved credit assessment process through better credit decision support applications (scoring/rating tools) • Share of real estate sector decreasing, existing portfolio regularly scrutinized • Strengthened risk units – Increased number of people dealing with problem loans – Strengthened workout team – Increasing cooperation with Swedabnk FR&R team – Improved the quality and increased frequency of portfolio quality reporting • Targets for new origination quality • Regular loan review process includes – Overall portfolio stress test once a year – Extensive portfolio analysis 2x per year, monthly/quarterly portfolio reviews + ad hoq individual portfolio deep-dive analysis – Monthly "watch list” report – IRB portfolio scoring 1x per month • On the individual loan basis: – Client rating review minimum 1x per year + review subject to material events – Rating classes 5 and higher are subject to more frequent assessment – Quarterly financials/covenants assessment – For SME/SSE and private portfolio weekly overdue report (with client names identified) 46
  • Credit quality management process • Proactive management of watch list clients – Private clients - communication on step-by-step actions to take before falling into overdues. Development of standard remedial action to ensure serviceability of the credit (assistance in family budget planning, restructuring of payments, postponement of payments for temporary income loss; assistance in voluntary sale of assets) – Corporate clients - proactive communication, frequent client meetings and positive attitude to find solutions • Overdue management - concentrates on time horizon from occurrence of distress situation (either through late payment or on the bases of client information) to moving credit over to restructuring or workout phase. The primary focuses in overdue management is: – Process design for fast and prudent management of overdues, clear process ownership – Constant re-evaluation of the tactics on their effectiveness and adequacy – Clearly set timing and channel of client contacts – Build capacity to work with distressed clients and adequate training of employees – Centralized decision making – Internal target setting and incentives to reach targets – Up to time reporting and follow up on taken activities • Distressed debt restructuring – Defined tactics of restructuring. Solutions to ensure client serviceability of the debt (based on industry of the client, collateral structure) – Extended capacity to work with distressed clients – Effective solutions for collected collaterals handling 47